1. Which of the following statements is true with
respect to debt securities?
a. Some types of debt securities always offer a higher
yield than others.
b. Debt securities offer very similar yield even if they
exhibit different characteristics that influen
Oregon University
3. A bond sold five weeks ago for $1,100. The bond is
worth $1,050 in today's market. Assuming no changes in
risk, which of the following is true?
A. The face value of the bond must be $1,100
B. The bond must be within one year of maturi
1. Market risk is the chance that a totally unexpected event
will have a significant effect on the value of the firm or a
specific investment. Answer: FALSE
2. Purchasing-power risk is the chance that changes in
interest rates will adversely affect the va
Estimating Incremental
Cash Flows
1
Learning Objectives
Difference between incremental cash flows
and sunk costs.
Identify different types of incremental cash
flows.
Know why financing cash flows are not
included in the analysis.
2
What is an incremental
Risk and Return
1
Learning Objectives
Define risk, risk aversion, and riskreturn tradeoff.
Measure risk.
Identify different types of risk.
Explain methods of risk reduction.
Describe how firms compensate for
risk.
Discuss the CAPM.
2
Expected Return
Risk and Return
1
Learning Objectives
Define risk, risk aversion, and riskreturn tradeoff.
Measure risk.
Identify different types of risk.
Explain methods of risk reduction.
Describe how firms compensate for
risk.
Discuss the CAPM.
2
Expected Return
CHAPTER SIX
Accrual Accounting and Valuation: Pricing Earnings
Concept Questions
C6.1. Analysts typically forecast eps and eps growth without consideration for how
earnings are affected by payout. That is, they forecast ex-dividend growth, not cumdividend
Problem 9 - 18
Optimal Weights:
Debt
Preferred Stock
Common Stock
30%
15%
55%
Tax rate
40%
Before Tax Cost of Debt
After Tax Cost of Debt
10%
6%
Cost of Preferred Stock
6.67%
Cost of Common Equity
10.17%
WACC
8.39%
Problem 9-21
Cost of Debt
Cost of Prefer
Chap 8
1)
2)
$1,402.55
a
b
c
d
3)
$50,000
$81,444.73
$129,687.12
$309,586.82
$10,794.63
4)
a
b
c
d
$155,796.74
$239,655.82
$364,248.25
$547,356.58
5)
a
b
c
d
$541,735.30
$812,602.95
$1,083,470.59
$1,354,338.24
6)
a
b
c
d
$105,740.50
$186,350.89
$328,413.9
Review of
Accounting
1
Learning
Objectives:
Use of the balance sheet, the
income statement, and the
statement of cash flows by
managers.
Calculation of depreciation.
How depreciation affects cash flow.
How taxes affect a firms value.
Calculation of m
Option Valuation
Related sections of BKM
Section 15.1 (Option valuation: introduction)
Section 15.2 (Binomial option pricing)
Section 15.3 (Black-Scholes option valuation)
Plus posted Lecture 15
A Simple Binomial Model
A stock price is currently $20
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond
matures is
1) _
A) default risk.
B) infl
The Time Value
of Money
Learning Objectives
The time value of money and its importance
to business.
The future value and present value of a single
amount.
The future value and present value of an
annuity.
The present value of a series of uneven cash
flows
The Cost
of Capital
1
Learning Goals
Sources of capital
Cost of each type of funding
Calculation of the weighted average cost of
capital (WACC)
Construction and use of the marginal cost of
capital schedule (MCC)
2
Factors Affecting the Cost of Capital
CHAPTER FIVE
Accrual Accounting and Valuation: Pricing Book Values
Concept Questions
C5.1. True. A firm with positive expected residual earnings (produced by an ROCE
above the cost of capital) must be valued at a premium.
C5.2. To trade at book value, we
Solution to Problem 3.
(a) levered FCF
Cash Oper.
Cap exp.
Lev FCF
10.9
( 5.2)
5.7
(b) Unlevered FCF = text-book "standard" FCF
Lev FCF
5.7
(see (a)
Int. Expense(AT) immaterial
Int Rev(AT)
(.4)
approx Av.Fin Assets x 0.035x0.65 =18 x 0.035x0.65 =0.4
cfw_
E1.5. Enterprise Market Value: General Mills and Hewlett-Packard
(a)
Market value of the equity = $80 150.0 million shares
=
Book value of total (short-term and long-term) debt
=
Enterprise value
$
12.000 billion
2.317
$
14.317 billion
Note three points:
E2.4. Accounting for a Savings Account
The financial statements for the first scenario are as follows:
BALANCE SHEET
Assets (cash)
$105
INCOME STATEMENT
Owners equity
$105
Cash investment
$5
0
Cash in financing activities:
0
Earnings
Cash from operations
FIN 3312-0: INVESTMENTS - CRN 12873
Assignment 4
Norris L. Larrymore, Ph.D.
Due: Monday, May 1, 2017
Problem 1
One Period Binomial A stock is selling for $32.70. The strike price on a call, maturing in
6 months, is $35. The possible stock prices at the en
5-6
a)
b)
c)
d)
e)
50.40%
13.77%
9.17%
12.87%
15.81%
5-7
a)
b)
3.49
2.43
5-8
a)
b)
D/A
TIE
5-9
a)
b)
c)
57.25 days
8.76
1.4
5-10
ROE =
ROE =
9.17% x 1.4
15.8%
5-14
a)
ROA
ROE
ROE
ROE
ROE
b)
c)
d)
18.61%
270 times
x
16%
32%
53.30%
160%
17.78%
1.23
Capital Budgeting
Decision Methods
1
Learning Objectives
The capital budgeting process.
Calculation of payback, NPV, IRR, and MIRR
for proposed projects.
Capital rationing.
Measurement of risk in capital budgeting and
how to deal with it.
2
The Capita
Derivatives (3 credits)
Professor Michel A. Robe
MT Exam: Practice Set & Solutions
To help students with the material, four practice sets with solutions will be handed out. They
will not be graded: the number of "points" for a question solely indicates it
Money and Banking
Quiz 3
1. A rise in the expected rate of inflation will cause
a/an_ in the general
level of interest rates.
a. increase b. decrease
bonds to _ and their yields to _ .
a. right; rise; fall
b. left; fall; rise
c. left; rise; fall
d. right;
SOLUTIONS O QUESTIONS ND PROBLEMS
T
A
Problem 8.8.
The Philadelphia Exchange offers European and American options with standard strike
prices and times to maturity. Options in the over-the-counter market have the advantage
that they can be tailored to mee
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